Written by: Little Cake

On August 31, DeFi Development Corp (NASDAQ: DFDV) submitted a preliminary prospectus to the SEC, proposing to issue 2.2 million shares of perpetual preferred stock named CHAD, with a public offering price of $9 per share and a par value of $10. The initial dividend yield is 13%, with the first dividend scheduled to be paid on October 1, followed by dividends on every business day thereafter. The company also plans to reserve funds equivalent to 12 months of dividends as reserves.

The use of raised funds is stated plainly: general corporate purposes, including the acquisition of SOL.

There is a competition underway among crypto treasury companies for yield products.

Three Preferred Stocks, An Arms Race

In the past six months, at least three crypto treasury companies have launched the same type of product to Wall Street: high-dividend perpetual preferred stocks, with the raised funds used to buy and hold crypto assets.

STRC is a product from Strategy (formerly MicroStrategy), with a par value of $100 and a current dividend yield of 12%, with dividends paid twice a month. Strategy has spent a total of $635 million repurchasing STRC, but its trading price has remained around $97.34, unable to return to par value. To support this preferred stock, Strategy has established a $4.65 billion reserve pool.

SATA is a product from Strive, with a par value of $100 and a dividend yield of 13%, paying dividends on every business day since June 16, becoming the first yield product in the history of US-listed securities to pay dividends daily. Strive is debt-free and holds over 15,000 BTC, claiming that, based on current BTC prices, the existing balance sheet structure can support SATA dividend payments for about 19.6 years. Since its launch, SATA has remained close to its $100 par value, with stable market performance.

CHAD is DFDV's attempt to enter the market. The key difference from the previous two is that the par value is only $10 (both STRC and SATA are $100), the public offering price is $9 (below par value), the underlying asset is SOL instead of BTC, and DFDV carries approximately $216 million in combined debt, with accumulated losses exceeding $200 million.

The trend in product design among the three is clear: the dividend yield has been pushed from 12% to 13%, the frequency of dividends has been increased from monthly to semi-monthly to daily, and reserves have shifted from being established afterward to being locked in synchronously with the IPO, with each subsequent entrant ramping up based on the previous product.

Where the Yield Comes From

The 13% annualized yield of these preferred stocks does not come from the crypto assets themselves. BTC and SOL do not generate interest, do not pay dividends, and do not produce cash flow. The true source of yield is a simple transmission chain:

The company continuously issues common stock via ATM (at market price) → The proceeds from the issuance are used to buy more crypto assets → The appreciation of crypto assets provides support for book value → Book value support allows for further issuance → A portion of the proceeds from the issuance is used to pay dividends on preferred stock.

Breaking this structure down: the dilution of common stock shareholders is the source of earnings for preferred stock shareholders.

In an environment of rising crypto asset prices, this cycle can self-reinforce: asset rises → market capitalization rises → ability to issue more increases → sufficient dividend sources → preferred stock maintains par value → credit rating stabilizes → more preferred stock is issued.

But when crypto asset prices fall, the cycle reverses: asset falls → market capitalization shrinks → ability to issue decreases → pressure on dividend payments increases → preferred stock falls below par value → forced to tap reserves → faces supply cutoff after reserves are depleted.

STRC is currently experiencing the early stages of this reversal. Strategy's BTC holdings are still considerable, but since STRC's listing, its price has consistently been below the $100 par value, forcing the company to initiate a $1 billion repurchase plan, having spent $635 million so far.

The 13% daily interest structure provided by SATA is one of the reasons STRC's par value is under pressure, as yield-sensitive investors now have an alternative choice with higher returns.

Special Risks of CHAD

DFDV's CHAD carries the highest risk among the three.

Difference in underlying assets: the volatility of SOL is significantly higher than that of BTC. Supporting a fixed income product with more volatile assets means that in a downturn, book impairments will occur more quickly and more severely.

Difference in balance sheets: As of the end of June, DFDV had $216 million in debt and accumulated losses of $203 million. CHAD ranks after all debts in the capital structure, prioritizing over common stock but subordinating to all creditors. In contrast, Strive has eliminated all debts.

Difference in governance: The dividend rate of CHAD is determined unilaterally by the board of directors, with a maximum adjustment limit of 50 basis points each time. The prospectus clearly states that the company has the right to reduce the dividend rate at any point without the consent of the shareholders.

The $10 par value is also worth noting. STRC and SATA target institutional and high-net-worth investors priced at $100 per share, while CHAD's pricing of $9/$10 is more geared towards attracting retail investors. The low par value lowers the entry barrier, but it also means that in the face of the same proportion of net value fluctuation, the absolute loss amount is smaller, resulting in weaker investor pain.

A Race to See "Whose Par Value Breaks First"

The competition among these three preferred stocks is not about who has a higher yield, but about who can maintain par value for a longer period.

STRC remains below $100 even after the $635 million repurchase. SATA maintains around $100 but relies on Strive's zero debt and BTC holdings for continued stability. CHAD has not yet been listed, but it is born into a market where predecessors are already facing par value pressure, with higher leverage and more volatile underlying assets.

For investors, the essence of these products is: using the volatility of crypto assets as collateral to sell you a dollar-denominated fixed income promise. When crypto assets rise, this promise is easy to fulfill; when crypto assets fall, the cost of this promise is borne jointly by common stockholders and the company's reserves.

Strive CEO Matthew Cole referred to SATA's daily interest structure as a "true innovation from zero to one in the history of American capital markets," and it is indeed innovative. The problem is, innovation does not equal safety. Before 2008, daily interest money market funds and structured notes were also considered safe yield products.

The ticker for CHAD is more honest than its name. The SEC's prospectus contains a risk warning that deserves to be retained in its original language: “We may not have sufficient funds to pay dividends in cash on the CHAD Stock, or we may choose not to pay dividends on the CHAD Stock.”

In plain language: Dividends may not be payable, or the company may not want to pay, so read this sentence before entering with a 13% annual interest.